Archive for June, 2014

The Chinese inflated a real estate bubble more than ten times larger than the United States. Bursting this bubble could destabilize the world economy. I recently asked what would happen if the Chinese housing bubble burst. The implications for Coastal California's real estate market is enormous as a crash in Chinese real estate would not just remove a component of local demand, it could turn Chinese buyers into desperate sellers. My sanguine attitude about the ability of lenders to maintain pricing through inventory restriction would change if desperate Chinese sellers began putting must-sell inventory on the market. The problems in China go beyond our little niche in the real estate world. A deflating housing bubble in China could destabilize their…[READ MORE]

If new mortgage rules will prevent housing bubbles, prudent fence-sitters have no urgency to buy for fear of being priced out of the housing market. The real estate industry hates homebuying fence-sitters. Those who make their incomes on real estate transactions aren't concerned about whether or not buyers are ready to buy or if they can sustain ownership; transactions are income, and the real estate industry wants more transactions, irrespective of how this may impact anyone else. Fence-sitters are a group of potential homebuyers who for a variety of reasons are not ready to buy today -- they are capable of buying, and they may plan to buy in the not-too-distant future, but for now, they are content to rent…[READ MORE]

The federal reserve began tapering bond purchases in December 2013, and the US economy shrank at a 2.9% annual rate in the first quarter of 2014. Coincidence? The federal reserve works to minimize the damage caused by economic downturns by stimulating the economy during recessions to prevent widespread price deflation and prevent widespread unemployment. People debate the efficacy and desirability of the federal reserves policies of central planning and interventionism, but the policy is supported by politicians and bankers while the public is largely oblivious to what goes on. When the Great Recession began in 2008, the federal reserve lowered the federal funds rate to zero; since it couldn't lower interest rates any further, the federal reserve began buying longer…[READ MORE]

With fewer investor purchases of single-family homes, the supply of single-family home rentals diminishes causing rents to rise. Investor purchases of single-family homes provided demand during a period when owner-occupant demand was weak; when combined with restricted MLS inventory due to increased loan modification efforts, investor purchases helped the housing market bottom in early 2012. One of the big stories of 2014 is the sudden and dramatic decline in investor sales because prices were pushed too high to meet their return requirements. The decrease in investor purchases also means the flood of single-family rental supply abruptly stopped, and as the existing inventory is absorbed this year, the rental market will tighten, and single-family home rents should begin to rise. The…[READ MORE]

Dashing hopes of academics that Americans were turning to small condos at transit stops, Americans are buying very large homes again. For years, academics in planning circles touted the rise of the small, high-density housing alternatives near mass-transit hubs. While this product might be the future of housing, it won't be due to any preference by Americans for smaller digs. People will substitute down to smaller properties conveniently located near mass transit, but they will do this because the more desirable McMansions in the suburbs will become too expensive. Builders aren't concerned with what academics think they should build; builders will provide whatever product buyers in the market want. Right now, the only group of buyers with the cash and…[READ MORE]

Condominium investments go bad, and sometimes the property can't be rented out to cover the expenses. Owners can't sell and can't rent, so they lose, lose, lose. I don't like speculating on investments with negative cashflow, particularly in real estate. If the purchase does not go as planned, the negative cashflow relentlessly drains your income, and in some circumstances, you simply can't get out. During the Great Housing Bubble, many speculators tried to make money through trading houses. The vast majority of these traders were not professionals but amateurs who thought they could be professionals. Most amateurs ended up losing money because they did not understand what it takes to be successful in a speculative market. The public adopts a…[READ MORE]

Contrary to conventional wisdom, low mortgage interest rates locked-in by today's buyers will not dissuade them from selling in the future. Housing economists point to the specter of rising interest rates as a deterrent to future move-up home sales, reasoning that the higher cost of ownership will provide a strong disincentive for move-up buyers to list and sell their homes. The idea rests on a faulty hidden assumption: that house prices will be higher when mortgage rates rise. Further, the idea fails to consider the equity-building power of loan amortization. Homebuyers are unprepared for reality of rising interest rates, but so are housing economists. Today's buyers who are locking in low mortgage rates will set the prices in the move-up…[READ MORE]

In the prime of the home selling season, new home starts and existing home sales both retreated, a sign of ongoing weakness in the housing sector. Sales are not supposed to slump in May or June. The prime home selling season generally peaks in July before slowing to a seasonal low on December 31. The last time home sales hit a weak patch in the prime selling season was 2011 after the expiration of the tax credits pulled demand forward in 2010 and left the market bereft of buyers. Prices fell in 2011 and on into early 2012, but with the diminished MLS inventory, price declines are unlikely, but continuing slow sales is nearly certain. May brings no sign of…[READ MORE]

The US housing market stabilized with low interest rates, low MLS inventory, low owner-occupant demand, and high but affordable house prices. The norm in California housing over the last 40 years has been extreme volatility. We had one stretch in the mid 1990s when prices were closely tethered to rent, but other than that house prices were either in a bubble or over-correcting to the downside. For the most part, the rest of the US did not participate in the wild price swings characteristic of California, but starting in 2003, financial innovation in housing finance brewed up a toxic concoction of unstable mortgage products that inflated a massive housing bubble and a deep over-correcting crash. Prior to the housing bubble,…[READ MORE]

Lawrence Yun of NAr is a paid industry shill who offers optimistic forecasts and spins housing market data for the National Association of realtors. Can the credibility of the National Association of realtors fall to less than zero? Lawrence Yun, chief economist for the NAr, is following in the footsteps of the thoroughly discredited David Lareah, working diligently to reduce the already low credibility of the NAr to less than zero by continually spinning market data and offering optimistic housing market forecasts that frequently prove completely incorrect. He was recently interviewed by the San Jose Mercury News about the potential for a housing bubble in the Bay Area. Today's post embellishes that original interview by asking and answering the questions…[READ MORE]