Archive for August, 2014

The Irvine Company wishes to replace the poor-performing Woodbridge Village Center with a condominium development that makes them more money. I recently wrote about the power of opposition groups to stop housing development in California. I was recently contacted by an activist in a community opposition group trying to save the Woodbridge Village Center. Personally, I think the Woodbridge Village Center should be saved. If I lived in Woodbridge, I would prefer to keep this well-designed community amenity rather than see it replaced with private condos. However, if I were the Irvine Company, I would want to replace this poor-performing center with something more valuable; they've determined condos is the best use for the property. If you have an opinion,…[READ MORE]

Both low mortgage interest rates and low house prices reduce ownership costs for financed buyers, but which one is better? Whether low house prices or low interest rates are better is a matter of perspective. From a lender's point of view today, low mortgage rates and high prices are better because they have so many underwater borrowers putting their capital at risk. Historically, lenders would prefer higher rates because interest is income, and they would rather make a higher rate of return by charging a higher interest rate, but the problem with underwater borrowers has shifted their preference. From the perspective of taxing authorities, lower mortgage rates and higher prices are always more desirable. Municipalities get their revenues from property…[READ MORE]

Housing bulls continue incorrectly predicting the return of Millennials and boomerang buyers. It's time to consider what happens if they never come back. As home ownership rates plummeted with waves of foreclosures in the aftermath of the housing bubble, real estate pundits pinned hopes for a real estate recovery on the return of so-called boomerang buyers, people who lost homes to short sale and foreclosure who return to home ownership. It's a compelling fantasy. It envisions hard-working Americans diligently saving for a down payment and paying their bills to improve their credit score as they eagerly await their opportunity to buy a home again. Reality is less supportive of the bullish fantasy. In the largest study ever conducted on boomerang buyers, the federal reserve concluded that less than 10%…[READ MORE]

Persistent shortages of housing in Coastal California inflates both rent and home ownership costs relative to incomes, making housing an economic drain. Despite the rapid home price increases from March 2012 to July 2013, I've consistently maintained we are not in a new bubble -- at least not yet. The housing market reports I publish each month compare the cost of owning real estate to the cost of renting it, and as long as these two alternatives for acquiring homes is in balance, I consider the market affordable. The weakness in this analysis is that it assumes either renting or owning is affordable, but if neither one is affordable relative to incomes, the market can be very unaffordable despite the…[READ MORE]

Headlines of house flipping and increased novice investor participation of signs of a top in the housing market for high-end homes. Contrarian investing is the art of selecting and timing investments by directly opposing the actions and attitudes embraced by the crowd of enthusiastic but ill-informed market participants. The central premise of contrarian investing is that the crowd is usually wrong, and the exuberance or panic of the crowd misprices assets, providing confident investors opportunities they can take advantage of. I have some experience with contrarian investing. I wrote extensively about a crash in the housing market in 2007 and 2008 when the crowd believe house prices could only go up at 10% or more per year forever. I rented…[READ MORE]

Coastal California housing demand from Chinese nationals surged in recent years; however, Chinese officials abruptly shut down this source of demand. The people who deny a real estate bubble in China are wrong, and the deflating Chinese property bubble could destabilize the world economy, but of greater interest to owners of Coastal California real estate, the deflating Chinese housing bubble could turn local real estate buyers into desperate sellers. Both homebuilders and real estate agents delude themselves with notions about the desirability of Coastal California to convince themselves the influx of Chinese money is based on sustainable fundamental factors. In reality, this is hot money escaping a collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese…[READ MORE]

Empowered by State regulations, local development opposition groups prevent construction of much-needed home supply creating shortages that inflate prices. When any commodity is in short supply, prices tend to rise; houses are no exception. Beginning in the 1970s, California produced more high paying jobs than it did houses. As a result, there were not enough houses to go around, so people began substituting down in quality to obtain a place to live. This downward substitution effect lifts house prices at every level of the housing ladder and prices out the lowest tier of the housing market. This phenomenon has been going on for so long, that most Californians resign themselves to the idea of living in lesser quality housing than…[READ MORE]

Loan modifications for underwater borrowers preserves the debt so appreciation that ordinarily supports a move-up housing market instead flows to lenders. Lenders limit financed homebuyers based on borrower income, yet many houses sell at prices prices far above the limits of borrowing power because buyers take profits from a previous sale to increase their down payment and bid up prices far in excess of what most first-time homebuyer can afford. The move-up market functions when equity accumulates; however, unrestrained mortgage equity withdrawal during the housing bubble plus a large number of peak buyers left many homeowners with little or no equity; millions of homeowners are still underwater. Without this accumulated equity, the the move-up market only finds support from the…[READ MORE]

Real estate industry lobbyists foster the false impression mortgage lending standards are tight. They are not. Real estate industry lobbyists appeal to lawmakers for policies the real estate industry believes will promote more transactions at higher prices. Most often this lobbying is short sighted and causes unintended long-term detrimental impacts on the housing market. For example, real estate industry lobbyists continually support relaxed lending standards. In 2004 they watched all of their dreams come true as all mortgage standards were abandoned causing a large boost in transaction volume and much higher home prices. Rather than being the panacea they envisioned, the abandonment of lending standards inflated a massive housing bubble that pulled forward demand, caused a deep house price crash,…[READ MORE]

Dashing hopes for a second-half recovery, existing home sales in Southern California steeply declined in July 2014. Do you remember all the happy talk and wishful thinking that dominated financial reporting over the last few months? Weren't we lead to expect a better second half of 2014? Supposedly the first quarter was weak due to bad weather, then the second quarter... well, economists and reporters really didn't have a plausible excuse for completely missing the ongoing slowdown in the second quarter, and now the much-anticipated second half recovery is turning into an epic disaster. This wasn't difficult to foresee. In the post Bold California housing market predictions for 2014, I said sales volumes would decline from 2013 levels because investors…[READ MORE]