Archive for 2014

Without affordability products the housing market depends on low mortgage rates for sales to occur at today's high prices. Back in February of 2013 when mortgage rates were near record lows, I wrote that future housing markets would be very interest-rate sensitive, despite assurances to the contrary from most macro-economists. The prevailing economic view is that the housing market would respond positively regardless of what happens with mortgage rates because house prices in the past have correlated poorly with mortgage rates. For example, during the 1970s, interest rates rose significantly, which should have caused house prices to drop, but instead California inflated a housing bubble. During the crash from the bubbles in the 1990s and the 2000s, interest rates declined,…[READ MORE]

Mel Watt announced a number of changes designed to loosen the credit box and stimulate lending. This doesn't mean a return to subprime. Those of us who watched the housing bubble and bust and detailed it's causes are greatly concerned about returning to the disastrous lending practices of the past. Although some degree of credit loosening was inevitable, the last thing any of us should want to see is a return to irresponsible subprime lending, particularly now that the US Taxpayer is liable for all the losses. Yesterday's announcement of loosening standards at the GSEs excited everyone in the housing industry. Lenders, realtors, and homebuilders all rejoice the opportunity to close more deals, but before they celebrate, they should take…[READ MORE]

Lenders didn't collect on bad debts during the recession when borrowers were broke, but now that personal finances are improving, lenders want their money. Most borrowers who defaulted on debts during the recession waited anxiously for their lenders to come after them for the bad debt. When lenders didn't pursue collection on bad debts at the time, most borrowers blithely assumed they no longer owed this money, but most often that isn't the case. Lenders were merely waiting until the borrowers became solvent before pursing them; after all, they can't get blood from a stone, and they can't get money from borrowers who are broke -- but lenders can get money from delinquent borrowers who now have stable income and…[READ MORE]

Historically, properties in this market sell at a 9.5% discount. Today's discount is 11.7%. This market is 2.1% undervalued. Median home price is $475,200 with a rental parity value of $536,800. This market's discount is $61,600. Monthly payment affordability has been improving over the last 5 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis increased from $382/SF to $386/SF. Resale prices have been rising for 7 month(s). Over the last 12 months, resale prices rose 18.3% indicating a longer term upward price trend. Median rental rates increased $25 last month from $2,440 to $2,465. The current capitalization rate (rent/price) is 5.0%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

The California Association of realtors housing market sales forecasts for 2013 and 2014 were way off. How bad will their 2015 miss be? Past performance is not always the best indicator of the skill of forecasters. For example, if meteorologists issue a standard forecast for weather in Southern California of morning clouds, afternoon sun, and highs in the upper 60s or low 70s, they would be correct over 80% of the time, but what have they forecast? Nothing. They merely predicted the average condition, and the average condition happened. The art of forecasting is to predict deviations from normal. It's a process of examining current conditions and running them forward with a deep understanding of how variables will interact and produce unusual outcomes. On…[READ MORE]

Will continuing population growth and shortages of housing and farmland make real estate the asset class to invest in during this century? Where is the best place to put your money today? At the bottom of the credit cycle, super-low interest rates inflate the value of all assets because investors are forced to take on more risk in a futile quest for yield. These flows of money inflate bubbles in most asset classes, and it sets up circumstances where money will flee risky asset classes as interest rates rise, causing yields to rise at the expense of asset values. Bill Gross recently left Pimco and expressed very bearish opinions on future interest rates and the value of bonds. The stock…[READ MORE]

The fundamental driver of home price appreciation is wage growth, and the housing market is stalling due to slow wage growth and weakness of the US economy. Financed buyers complete most home sales, so the borrowing power of financed buyers generally sets the prevailing price levels in most real estate markets. The ability of financed buyers to raise their bids and push prices higher depends on the amount of savings they have, their verifiable wage income, allowable debt-to-income ratios, and mortgage interest rates. Because wages are central to the lending equation, growth of wages is the strongest determinant of long-term housing market prices. For the housing market to really improve, the fundamentals underpinning the market must improve because manipulating inventory and interest rates can only carry…[READ MORE]

Housing hits another weak patch as investors balk at high prices. Will housing see another decline similar to 2008 or 2011? Ever since house prices began a steep, deep, and unprecedented decline in 2008, the government, lenders, and the federal reserve have changed policies and applied stimulus of various kinds to reverse the decline and reflate the previous bubble in order to restore collateral backing to bubble-era home loans to preserve the solvency of our banking system. Each manipulation and policy change managed to pull demand forward and prompt buyers to act sooner than they otherwise would at price points higher than they otherwise would. When the stimulus was removed, financial gravity took over, and prices went lower. The latest…[READ MORE]

Lenders retreated to the normal, safe and prudent lending standards of the 1990s in the wake of the housing bust. Lending standards don't evolve through a process of innovation; they move in cycles. Lending standards start from a position of stability, and over time, competition drives lenders to lower standards and experiment with riskier loan programs until the entire system becomes unstable. Then some economic disruption, or as happened in 2007, large numbers of borrowers default, and the entire system crumbles, a credit crunch ensues, and lending standards retreat to the stable levels where they started. Despite how obvious and predictable this cycle is, the lending industry repeats their mistakes every few decades. In the latest go-round, lenders touted their…[READ MORE]

Historically, properties in this market sell at a 0.6% premium. Today's discount is 0.8%. This market is 1.4% undervalued. Median home price is $565,300 with a rental parity value of $569,900. This market's discount is $4,600. Monthly payment affordability has been improving over the last 3 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis increased from $372/SF to $375/SF. Resale prices have been rising for 8 month(s). Over the last 12 months, resale prices rose 8.7% indicating a longer term upward price trend. Median rental rates increased $16 last month from $2,600 to $2,616. The current capitalization rate (rent/price) is 4.4%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

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