Archive for June, 2014

Under pressure from real estate industry lobbyists, government regulators completely cave in and allow banks to underwrite bad loans with no risk retention. In what can only be described as a complete abdication of responsibility, government regulators will allow banks to underwrite no-money down loans without retaining the mandated 5% risk retention on their books. The last vestige of hope for a stable real estate market was set aside so lenders can make more money by putting unstable and unqualified borrowers into loans they shouldn't be given -- and taxpayers will likely pick up the tab when these loans go bad. The 5% risk retention provision is part of the Dodd-Frank financial reform bill. It's designed to force lenders to…[READ MORE]

Americans have too much mortgage debt, student loan debt, credit card debt, but the only solutions offered by Washington create even more debt. It's un-American for banks to lose money. American banks are rarely forced to write down a bad loans by regulators, and legislators bail out banks when they get in financial trouble. Our legislators suffer from the collective delusion that what's good for the banks is good for America; in reality, the opposite is generally true. Right now, what's good for the banks is preserving the book value of loans even when the market value is considerably lower. Regulators allow bankers to post whatever value they see fit based on their "sophisticated" financial models, preventing bankers from recognizing…[READ MORE]

Two professors suggest modifying standard terms of home mortgages to allow lower payments in a recession in exchange for upside appreciation. Would it work? Are there any circumstances under which homebuyers would be willing to share in the upside on a home purchase? Last year I wrote about the concept of equity share as an option for housing bears. In that program, an investor puts up half the down payment in exchange for half the net profit at sale. Anyone who believes house prices will not rise would strongly consider such a deal because someone else ties up their money in the property rather than the buyer. Today's post concerns another idea two professors came up with to entice borrowers…[READ MORE]

During the spring selling season, house prices are up slightly while the cost of ownership and rents are unchanged. Over the last few months of the prime selling season, many market pundits lamented the lack of sales, but most continued to point to year-over-year gains as a positive sign for the housing market. The recent drop in mortgage interest rates has allowed borrowers to increase their leverage on flat incomes, so buyers have been able to raise their bids slightly during this spring selling season; however, since job creation is weak and wages are stagnant, sales volumes are low, and the cost of ownership is practically unchanged; rents are also unchanged. Over the last nine months, the median resale prices…[READ MORE]

Falling mortgage interest rates allow people to borrow more and pay more, but the economy must create high-paying jobs to revive the housing market. Real estate demand has two components: purchasing power, and total number of qualified buyers. Low mortgage rates increases the buying power of the majority who use financing, so low rates tend to make prices rise; however, low rates do nothing to increase the size of the buyer pool to improve sales volumes. Our current economic environment, the weak job and wage growth hobbles housing; thus transaction volumes are very low, despite low mortgage rates. By the beginning of next month, mortgage interest rates will be lower year-over-year. Ever since mortgage rates rose abruptly last May and…[READ MORE]

Many wealthy and powerful people make Coastal California their home because of the weather, and they build companies and stimulate the economy. The local climate in Coastal California contributes to real estate value, but not because everyone wants to live here. By far the largest reason Coastal California house prices are so high is because there are many high-paying jobs and many wealthy businesspeople who operate businesses here. The climate is arguably as good in Tijuana, but Tijuana is not known for high real estate values. The most expensive real estate in the US is at the Hamptons in New York, but the climate there isn't very good at all. Perhaps it can be argued that successful business owners who…[READ MORE]

Russ Wetherill, June 7, 2014 The Cat in the Hat knows all about that. I read a story to my four-year-old every night before bed, often it’s a Dr. Seuss book. I’ve come to appreciate the wisdom of these parables, and find the common sense contained in these stories applies just about everywhere; even housing, where common sense isn’t as common as nonsense. This is the first article in a one-article series loosely related to Dr. Seuss and even looselier related to housing. In the classic Dr. Seuss style, I will be telling the stories entirely by rhyming … just kidding. Or am I? PART I – “Did I ever tell you how lucky you are?” This Dr. Seuss story,…[READ MORE]

Overall lending is up, particularly for HELOCs, but lenders are very choosy about who they lend money to, saying no to Ponzis. Lenders were burned by millions of borrowers running personal Ponzi schemes during the 00s. I documented thousands of cases of people borrowing and spending their houses during the housing bubble, and many others were running Ponzi schemes with credit cards and other debt instruments. Lenders had to endure painful write downs during the recession (as they should), so they are not eager to restart millions of individual Ponzi schemes and lose billions of dollars again in the next recession -- or at least they should be worried about giving away free money, but maybe they aren't.... Borrowers Tap…[READ MORE]

No matter how bad housing market conditions look, inventory restriction engineered by lenders will keep prices up and prevent a crash. Back during the financial mania, I enjoyed writing about the upcoming housing crash. As with any mania, people were irrational, and nobody wanted to believe a catastrophe was right around the corner, and people like me who sounded the alarm were dismissed as doom and gloomers who didn't know what we were talking about. Some writers are naturally bearish, and they enjoy the outsider role. Most often they are ridiculed on the fringe until a financial collapse vaults them to prominence. Many people thought I was a permabear until 2010 when I started telling people to buy Las Vegas…[READ MORE]

With the elimination of toxic mortgage products, high prices cause demand to falter, as it should; it also signals new mortgage regulations work as planned. Everyone wants to buy a home and see it go up in value. Most people assume the greater the increase the better because they don't want to believe there is a natural limit to home price appreciation determined by income growth. During boom times, people blithely assume the magic appreciation fairy doles out free money with no end in sight; however, that free money was created by the last buyer in the neighborhood establishing a new comparable sales value for everyone. Everyone cheers the new comparable sale while the last borrowers who set that value…[READ MORE]

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