Archive for 2014

Most real estate investors are really speculators betting on appreciation. It's a strategy destined to be a loser. Real estate investors during the housing bubble put their money to work on faith. There is no logical reason to believe house prices only go up. In fact, there have been two prior periods in California’s recent history where house prices did, in fact, go down. However, with kool aid intoxication, otherwise known as faith-based investing, reality is ignored. If you truly believe house prices only go up, no price is too high, and you don’t have to worry about a backup plan if house prices don’t go up. There is only one viable backup plan when a speculative play on appreciation…[READ MORE]

Borrowers have moral responsibility to default on loans where the payment on an amortizing mortgage exceeds the cost of a comparable rental. The fear of strategic default is a necessary deterrent to foolish lending. Without it, lenders are emboldened to make all manner of bad loans because they believe they will get paid back. Have you noticed the explosion of dodgy subprime auto loans that proliferated when automatic shutoff systems were installed? Lenders will make nearly any loan if they believe they will get their money back with interest. It’s only when they feel they won’t get repaid are they prompted to loan responsibly. Signatory versus asset-backed debt Some have questioned how I can be so against debt, yet I…[READ MORE]

Is foreclosure the end of the American Dream, or is it a fresh start and an opportunity for redemption? I manage a number of properties in Las Vegas, and when I acquired them, I often had to evict the former owners who squatted there after the foreclosure. Some foreclosure and eviction cases can be heartbreaking. However, we live by rule of law in this country, and unless we want to start giving away real estate to those with the saddest story, these evictions must take place. My family’s eviction story My grandmother’s blind sister was 82 years old when she was evicted from her paid-off family home for a highway construction project. True story. Rather than wait a few more…[READ MORE]

 In order to prevent foreclosures and theft of taxpayer money through bailouts, mortgage equity withdrawal should be limited and regulated. I don't like government paternalism. When Ronald Reagan came to power and began our 25 year experiment with government deregulation, I thought it was a good idea. It used to really annoy me when I would see paternalistic politicians who believed they knew what was good for me and for society, and that their ideas of right and wrong should be legislated. Government intrusions into the lives of citizens should be kept to a minimum, and citizens should have the right to make their own decisions and live with the consequences. Well, maybe not. I used to believe all of…[READ MORE]

In its simplest form, a personal Ponzi scheme is borrowing money to pay debt service: acquiring new debt to pay old debt. It's a path to disaster. What does it mean to run a personal Ponzi scheme? Aren't Ponzi schemes the advanced financial management crime of sophisticated money managers like Bernie Madoff? Not really. A Ponzi Scheme is any investment where the returns come not from the investment but from the capital contributions of new investors. If you change the terms slightly, a Ponzi Scheme is also any debt where the payment of debt comes not from wage income but from borrowed money from new lenders. In that respect, personal Ponzi schemes are easy to begin and grow. Anyone can borrow…[READ MORE]

Historically, properties in this market sell at a 0.6% premium. Today's discount is 2.3%. This market is 3.0% undervalued. Median home price is $565,800 with a rental parity value of $584,600. This market's discount is $18,800. Monthly payment affordability has been improving over the last 5 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis increased from $374/SF to $374/SF. Resale prices have been rising for 1 month(s). Over the last 12 months, resale prices rose 6.1% indicating a longer term upward price trend. Median rental rates declined $16 last month from $2,650 to $2,633. The current capitalization rate (rent/price) is 4.5%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

Lenders argue reducing principal balances in bankruptcy proceedings would increase borrowing costs. The federal reserve disagrees. Ever since the Great Housing Bubble began to deflate, everyone incorrectly identified foreclosure as a problem because foreclosure pushes people out of the house the bank bought for them. The real problem is not foreclosure; the real problem is that borrowers have excessive debts due to the huge loans lenders underwrote that inflated the housing bubble. Foreclosure is not the problem, it is the cure. Principal reductions are the worst possible solution to the problem of excess debt left over from the Great Housing Bubble. Principal reductions merely gives foolish borrowers a pass. If the borrowers go through foreclosure, they have consequences that minimize moral hazard:…[READ MORE]

There are four fundamentals that determine resale value: borrower income, allowable debt-to-income ratios, interest rates, and down payment requirements. When economists think about the fundamentals of housing, they usually talk about job and wage growth, both of which impact the broader market trends of prices and sales, but job and wage growth doesn't provide a conceptual framework for establishing the equilibrium price level the market establishes. On a more basic microeconomic level, job and wage growth are only important in that they impact a borrower's income, which is a true fundamental. Fluctuations in supply and demand are not fundamentals. Restricted inventory caused by loan modifications and denying short sales -- the tactic lenders used to reflate the housing bubble --…[READ MORE]

The emotional reasons for buying a house are real and valid, and even the most ardent renter should acknowledge them. The need for shelter is basic, often closely followed by the desire for community. In the United States, this often translates into a desire to take on a very large mortgage to buy real estate. These basic human emotions drive much of the activity in real estate markets. Most people buy because it is the right time for them; their career, age, family circumstances push people toward ownership at different times. Some are fortunate and buy at the bottom of the real estate cycle; some are not so fortunate and buy at the peak. The primary reasons to buy a…[READ MORE]

The exciting era of increasing financial freedom through household deleveraging recently came to an end. Why should we celebrate when debt increases? Does anyone like debt? Does anyone want more debt? Debt is not income, despite what some people may think. In a lender’s ideal world, borrowers would turn to lenders the moment a borrower gets a raise to turn that slow trickle of income into a torrent of debt spending. In that way, lenders can suck that income out of the borrower with interest payments leaving the borrower no better off than before, other than perhaps the brief spender's high from the new credit line. In the Great Recession lenders and the federal reserve instituted policies designed to preserve…[READ MORE]

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