Archive for February, 2015

Underwriting loans to unqualified borrowers with super-low FICO scores is a recipe for another crisis of loan delinquencies and foreclosures. Many have quipped that FHA has become the replacement for subprime because they have very low standards for qualification, a very low down payment requirement (currently 3.5%), and as a result, they have become the loan-of-necessity for anyone who doesn’t have the credit requirements or the down payment necessary to obtain other financing. In other words, they have stepped into the void left by the collapse of subprime lending. I recently reported that the FHA reduced it's insurance fees to spur first-time homebuying; this move came despite the fact the fund maintains reserves far below it's mandate. Many Congressional Republicans…[READ MORE]

When house prices are falling and it's cheaper to rent than to own, strategic default becomes widespread, and banks are powerless to prevent it. One of the great advances which has come from the Internet is the quick dissemination of useful information. In short, secrets don’t remain secret very long. Lenders didn’t want borrowers to know that their friends and neighbors stopped paying their mortgages, and their lives improved. Lenders want borrowers to remain in the dark and fall victim to old beliefs and habits which prompt them to keep paying even when it is not in their best interest to do so. Unfortunately, the quick spread of information on the Internet got out the word, and “mavens” like myself…[READ MORE]

Historically, properties in this market sell at a 9.5% discount. Today's discount is 15.7%. This market is 6.2% undervalued. Median home price is $469,300 with a rental parity value of $569,000. This market's discount is $99,700. Monthly payment affordability has been improving over the last 9 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis increased from $388/SF to $395/SF. Resale prices have been rising for 11 month(s). Over the last 12 months, resale prices rose 10.6% indicating a longer term upward price trend. Median rental rates increased $0 last month from $2,474 to $2,474. The current capitalization rate (rent/price) is 5.1%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

Many people read financial news for emotional confirmation about decisions they already made, and the financial media panders to these readers. I've written a number of times about the tendency of financial media reporters to provide optimistic spin and emotional support to gain readers, and reporters hope to influence public behavior and stimulate the economy. Personally, I think providing emotional therapy is a task better left to family, friends, or paid therapists, and the idea of MOPE (Management of Perspective Economics) is pure lunacy. No matter how influential the reporter, they simply don't have the power to move financial markets or the overall economy. I had people condemn me back in 2007 and 2008 for "talking down the housing market."…[READ MORE]

Borrowing home equity to invest is generally a loser's game because the only road to success requires excessive risk. With mortgage rates below 4% and the stock market moving ever higher, many people are tempted to extract their home equity to play in the markets. It's hoped that investing over the long term will yield a rate of return in excess of the cost of borrowing that money. Personally, I think it's a foolish idea. Professional investors evaluated the risk and reward potential of a variety of investment alternatives and determined that providing the money for a home mortgage at 4% was the best risk and reward available. The only way an ordinary investor is going to beat the pros…[READ MORE]

The Chinese government is loosening restrictions on the flow of capital, inflating real estate values in California. Is the influx of Chinese money is based on sustainable fundamental factors? I don't think so. In my opinion, this is hot money escaping an inflated and collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China. Most California real estate market bulls and enthusiasts blithely assume the influx of Chinese money will never stop because everyone in China wants to live here, right? Unfortunately, in the real world, for money to leave China, it generally has to pass…[READ MORE]

Only 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default. Hope for a better tomorrow is a basic human need; people who give up hope often become deeply despondent and even suicidal. People look for hope wherever they can find it, and over the last eight years, people who work in real estate, homebuilding, sales, and so on, needed hope for a better tomorrow because the current situation consistently sucked. Anyone out of work over the last several years spent most of their time scouring job boards and résumé spamming job posting sites, and since they were already on the web, most would also check the news for any…[READ MORE]

Today’s 4% mortgage rates represent an artificial transfer of wealth from Generation X, Generation Y, and Millennials to Baby Boomers. Even before the housing bubble created a great deal of false wealth, baby boomers were the recipients of an artificial boost in home prices due to 25 years of falling mortgage interest rates. At least 40% of the value of their homes was created totally by increased borrowing power of subsequent buyers. Consider the following: the chart below shows the monthly cost of ownership from 1988 to 2015, and from 1989-1991 and again from 2011-2013, the monthly cost of ownership was approximately $1,850. Twenty-four years apart, the cost of ownership on a monthly basis was unchanged, yet house prices were…[READ MORE]

Historically, properties in this market sell at a 0.6% premium. Today's discount is 5.1%. This market is 5.7% undervalued. Median home price is $560,800 with a rental parity value of $601,600. This market's discount is $40,800. Monthly payment affordability has been improving over the last 9 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis declined from $375/SF to $374/SF. Resale prices have been falling for 1 month(s). Over the last 12 months, resale prices rose 5.9% indicating a longer term upward price trend. Median rental rates declined $16 last month from $2,632 to $2,615. 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]

There is no evidence Millennials are becoming more active in the housing market, but hopeful anecdotes warm the hearts of realtors and homebuilders. Ever since the collapse of house prices and sales in 2007, homebuilders, realtors, and everyone else who depends on real estate sales finds a new Messiah each year that will save the housing market. Each year they are disappointed. For the last two years it was the boomerang buyer, those former homeowners who were supposed to return to the housing market in droves. Of course, they didn't, and the false hope and wishful thinking resulted in dashed hopes for 2014. For 2015 the false hope and wishful thinking is centered on Millennials, those born approximately between the…[READ MORE]

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