Archive for March, 2015

Bidding wars in an environment of weak demand are a sure sign of restricted inventory, a problem intentionally engineered by lenders. When I wrote Must-sell shadow inventory has morphed into can’t-sell cloud inventory, I outlined how lenders removed inventory from the MLS by denying short sales and by modifying home loans rather than foreclosing on delinquent borrowers and selling the resulting REO. Lenders schemed to reduce the MLS inventory enough to engineer an artificial shortage of homes available and force buyers to pay higher prices. They were successful. But other than rising home prices, what evidence do I have that these policies contributed to rising prices? We know from the graph of purchase mortgage originations that demand for housing hasn't…[READ MORE]

Flippers find most of their below-market deals from short sales. Ordinarily, the IRS considers forgiven debt a form of income, which it is. In 2007 Congress passed the Mortgage Foreclosure Debt Forgiveness Act which allowed borrowers who short sell their houses to avoid taxation on forgiven debt. Many borrowers availed themselves of this tax break and extricated themselves from a bad housing situation. The Act originally was scheduled to end in 2013, but the huge number of underwater borrowers (and lobbying by reporters and left-wing advocates) got the Act extended through the end of 2014. The usual suspects are back decrying the end of the tax break and lobbying for its extension through 2015. What makes this round of lobbying…[READ MORE]

Millennials will enter the housing market as first-time homebuyers over the next several years, but likely in smaller numbers than previous generations. The Millennial generation is larger than the Baby Boomer generation, and Millennials are entering the stage in their lifecycles when people typically buy homes; therefore, the biggest component of housing demand over the next 20 years will likely be Millennial buyers. This is why the buying behavior of Millennials gains so much attention among homebuilders. So far Millennials have not entered the housing market in large numbers. (See: Why aren't Millennials buying homes?) Most analysts point to excessive student loan debt, high unemployment, low wages, and delayed marriage (probably as a result of the previous three issues) as…[READ MORE]

Cloud inventory restrictions, rising house prices, and stagnant wages is forcing homebuyers to substitute downward in quality if they want to buy a house. For the last three years, house prices have gone up in price, but the incomes of most buyers has not. This simple fact forces buyers to make a choice: either get a lesser quality house, or keep renting. The decision to get a lesser quality house is the downward substitution effect. Not everyone will make the choice to substitute downward in quality, particularly if they can rent a nicer house for the same money. Since not everyone is willing to accept less just to own, as prices keep rising faster than wages, sales volumes weaken, which…[READ MORE]

FHA mortgage insurance is expensive, and it's difficult to get rid of. We are at record low interest rates, so in all likelihood, mortgage rates will go higher from here. Although it may be possible to refinance later to eliminate the insurance premium, it may not be advantageous if refinancing carries a much higher interest rate. It’s very possible some of these borrowers may be paying that onerous FHA insurance premium for a very long time. Ditching FHA mortgage insurance no easy task By JEFF LAZERSON, March 12, 2015 If you have a Federal Housing Administration loan and are itching to extricate yourself from the FHA mortgage insurance, there are many forks in the road you can take. You just…[READ MORE]

Historically, properties in this market sell at a 9.5% discount. Today's discount is 16.7%. This market is 7.2% undervalued. Median home price is $467,600 with a rental parity value of $563,700. This market's discount is $96,100. Monthly payment affordability has been improving over the last 10 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis declined from $395/SF to $389/SF. Resale prices have been falling for 1 month(s). Over the last 12 months, resale prices rose 9.0% indicating a longer term upward price trend. Median rental rates increased $4 last month from $2,474 to $2,478. 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]

As loan modifications redefault, lenders will either modify the loans repeatedly, or they will finally foreclose and resolve the bad loan permanently. When lenders first embarked on the charade of loan modifications to delay foreclosures, I didn't believe they could effectively use this ruse to stop foreclosures and remove the distressed inventory from the MLS because recurring foreclosures would force them to follow another course. I was wrong. The first round of loan modifications failed miserably, as I thought they would, but rather than change course, lenders increased their bets and went "all in" on loan modifications. By choosing can-kicking over foreclosure no matter the price, lenders managed to gain control of MLS inventory and engineer the bottom in house…[READ MORE]

The more new buyers borrow to buy neighborhood properties, the more home values go up, and the more home equity appears out of the ether. Where does home equity come from? Does it appear by magic, a gift of the appreciation fairy? Does it accumulate by discipline through paying down a mortgage? Both factors are at work, but unless you believe the appreciation fairy listens to your prayers, the only factor that builds home equity you have control over is the amount of debt encumbering the property. So how does the appreciation fairy work? In concept house prices should rise gently over time to match the growth of wages in the area. In practice house prices rise and fall violently…[READ MORE]

Should the federal reserve try to prevent asset bubbles or merely clean up in the aftermath? Financial manias are costly to society because they divert scarce resources away from productive ends toward wasteful enterprises that consume resources without creating any real value. If we could identify asset bubbles and eliminate them before they started, our economy would more efficiently allocate the resources available. Do you remember the dotcom bubble? Thousands of new web companies obtained financing to launch dubious ventures that squandered investor money creating no value. Often the only residual value of these businesses was the salvaged phone systems or office cubicles; the products were worthless. Couldn't that money have been invested in something more productive? There is little…[READ MORE]

The housing bubble was not a subprime problem: it was a middle-class prime borrower problem. Conventional wisdom holds that the housing bubble and bust was caused by loaning money to subprime borrowers who defaulted in large numbers and fell into foreclosure, resulting in a dramatic price crash. Many believe the housing crash would have been avoided if lenders simply hadn't loaned money to subprime borrowers. The conventional wisdom is wrong. The collapse of the housing bubble was inevitable because the loan products upon which pricing depended were unstable. Although the subprime borrowers defaulted first, all borrowers defaulted in large numbers because the loans there were given were toxic; in fact, delinquency rates were many times normal for prime borrowers as…[READ MORE]

In Memoriam: Tony Bliss 1966-2012