Archive for June, 2015

Some forms of debt are better than others. I make no secret of my disdain for the behavior of bankers during the housing bubble. I’m not so extreme that I consider all borrowing and lending to be evil; however, I draw a clear distinction between what I consider good debt, useful for economic efficiency, and bad debt, useless and unproductive that results in misallocations of capital and human suffering. Surprisingly enough, the line separating the two is clear and easy to calculate and quantify. Signatory versus asset-backed debt Not all debt is created equal. asset-backed debt is collateralized by a cashflow-producing asset. The income stream is being used to repay the debt with interest, and if for some reason the…[READ MORE]

If lender lobbyists don't roll back Dodd-Frank, the new mortgage rules will prevent future housing bubbles. Everyone wants to buy a home and see it go up in value. Most people assume the greater the increase the better because they don’t want to believe there is a natural limit to home price appreciation determined by income growth. During boom times, people blithely assume the magic appreciation fairy doles out free money with no end in sight; however, that free money was created by the last buyer in the neighborhood establishing a new comparable sales value for everyone. Everyone cheers the new comparable sale while the last borrowers who set that value struggle with payments on a huge mortgage, sometimes not…[READ MORE]

realtors are more interested in generating false urgency than helping buyers make a sound decision that's best for their family. When a realtor talks, at some level you know that most of what they say is bullshit. They aren't necessarily liars that intentionally make false statements, they are bullshitters, people who make statements without regard to the truth, usually to manipulate behavior for self-serving reasons. realtors don't care about truth. realtors want only one thing: to generate the largest commission possible with the least amount of time and effort. Bullshit helps reach their goal because bullshit smooths over all objections by telling people what they want to hear. The Credibility Continuum The credibility of anyone’s opinions relies on the history…[READ MORE]

Are the bulls back for good? Can real estate only go up forever (again)? The housing bubble was first and foremost a financial mania. People held obviously foolish beliefs as absolute truths, and they would vigorously defend their foolish ideas even after the bust when the folly was exposed for all to see. During the 00s, blogs were popular to the point of being a fad, and many people enthusiastically participated in the conversations in the comments on posts, a tradition we carry on here now. One of the most prolific commenters on many of the blogs, but particularly the OC Register blog was a commenter known by several aliases, but most widely known as Truthi. Truthi would spam the…[READ MORE]

Historically, properties in this market sell at a 9.5% discount. Today's discount is 16.9%. This market is 7.4% undervalued. Median home price is $479,600 with a rental parity value of $569,000. This market's discount is $89,400. Monthly payment affordability has been improving over the last 8 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis increased from $394/SF to $396/SF. Resale prices have been rising for 3 month(s). Over the last 12 months, resale prices rose 8.9% indicating a longer term upward price trend. Median rental rates increased $11 last month from $2,501 to $2,513. 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]

Many delinquent mortgage squatters game the system to enjoy free housing for as long as they can. It's no secret that banks are willing to modify any delinquent loan if the borrower merely asks. Since nearly all the outstanding delinquent loans are properties worth less than the outstanding loan balance, banks are unwilling to foreclose and record the losses, so they will cut any deal possible to get some repayment until the value of the house rises high enough the bank can make a full recovery in foreclosure. Since banks are willing to give any delinquent borrower a loan modification, any borrowers who are still delinquent are delinquent by choice -- they would rather squat than pay anything. It's difficult…[READ MORE]

The next generation of entry-level housing won't be built if lenders burden the available land with bad bubble-era loans. The valuation of land used for residential housing is mysterious and often misunderstood. The valuation of lots and raw land requires a detailed knowledge of construction and marketing costs as well as a good estimate of the sales price of the final product: a residential housing unit. In short, the value of a lot is the total revenue (sales price of the home) minus the costs of production and the necessary profit. Land value is a residual calculation. The value of a piece of land is whatever is “left over” after all the other costs of production and profits are subtracted…[READ MORE]

Do Millennials reject the American dream of home Ownership, or does it reject them? If you are over 40, when you entered the workforce, you had little or no debt, there was a job waiting for you, and house prices were affordable. All you needed to do was save a few bucks, and you could buy your own home and live the American Dream. If you are under 35, that isn't your reality. For those over 40, I want to perform a though experiment. Imagine you graduated college in the last 10 years, and in order to get the degree that qualified you for a high-paying job, you must give 10% or more of your gross income to a lender…[READ MORE]

Voters warm to the idea of reforming Proposition 13, but large financial interests would vigorously oppose any attempts to curtail their subsidy. As we discussed yesterday, California is limited in its ability to tax real estate by Proposition 13. Proposition 13 limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases. Ostensibly put in place to prevent government profligacy during periods of rising real estate values, it's devolved into a tax-shifting mechanism that greatly benefits owners of commercial real estate. Proposition 13 tends to limit move-up trading because it requires owners to increase their property tax bill, sometimes dramatically. There are basis transfers and ways around this problem for certain people who qualify,…[READ MORE]

Other necessary costs of ownership consume a quarter to half the amount borrowers could potentially put toward loan payments. When lenders calculate how much they are willing to loan to any particular borrower, they measure the borrowers income from wages and other sources and calculate how much of that monthly income is available to pay the debt. One limitation on borrowing is the front-end ratio, generally 31% of verifiable gross income. Lenders assume that a borrower can afford to spend 31% of their gross income on all housing related expenses and still have enough money left over to pay all other obligations and have a life. This 31% is called PITI, or principal, interest, taxes, and insurance. The lender is primarily…[READ MORE]

In Memoriam: Tony Bliss 1966-2012