Archive for July, 2015

Raising the conforming loan limit encourages affluent borrowers to buy expensive homes, the opposite of what lawmakers intended when the subsidies began. In order to spur lending to lower and middle income Americans, the GSEs and FHA provide loan guarantees to mortgage loans under the conforming limit. The money for mortgage loans is all private money, but with the government guarantee on smaller loans to less affluent Americans, the cost of these loans is lower, and lenders will underwrite more of them, which is what the policymakers intended to accomplish. During the housing bubble, the conforming limit rose as high as $417,000, but when the housing bubble burst, this limit was raised to $729,750 in markets like Coastal California that…[READ MORE]

The monthly housing market reports will now be made available for direct download with these weekend posts. If you want access to all reports and the archives, please register with the site and visit the Subscriber’s Reports page. Historically,  properties  in  this  market  sell  at  a  18.5%  discount.  Today's  discount  is  23.2%.  This  market  is  4.6%  undervalued. Median  home  price  is  $300,100  with  a  rental  parity  value  of  $380,600.  This  market's  discount  is  $80,500. Monthly  payment  affordability  has  been  worsening  over  the  last  2  month(s).  Momentum  suggests  worsening  affordability. Resale  prices  on  a  $/SF  basis  increased  from  $169/SF  to  $170/SF.  Resale  prices  have  been  rising  for  4  month(s). Over  the  last  12  months,  resale  prices  rose  3.7%  indicating  a  longer …[READ MORE]

California is not in another housing bubble yet, but prices are high relative to income thanks to low mortgage rates. Nobody wants to be a peak buyer, so fear of a housing bubble stops some people from buying homes, but are these fears well founded? Are we inflating housing bubble 2.0 (actually 4.0 in California)? Because houses seem so expensive and prices rose so rapidly, particularly in California where kool aid intoxication is a cultural addiction, many people are wondering if we are inflating another housing bubble. My answer to that question is no. We are not inflating a new housing bubble -- we are reflating the old one, but the interest rate stimulus used to reflate the bubble is…[READ MORE]

Lower wage earners, including most who don't graduate college, may never earn enough to save for a down payment to own a house in California. When I first wrote about the housing bubble back in 2007, I argued forcefully that it was not possible for everyone to get priced out of the real estate market. At the time, with prices already high and rising rapidly, many people fueled the bubble from panic, buying from fear and driving prices even higher. One person relayed their story of saving $10,000 each year from 2002-2005 only to watch house prices rise so fast they were falling farther behind. Out of fear and desperation they bought a property in 2006 only to be burned…[READ MORE]

The three main measures of financial performance for rental real estate are capitalization rate, cash-on-cash return, and internal rate of return. When people buy a personal residence, they often solace themselves that the high prices is warranted because the property is a good investment. Novices generally assume that anything they sell for more than they paid is a good investment without any understanding of what a good investment really is. It's not enough to merely make a profit, the amount of profit relative to the amount of money spent is also important. Further, the amount of time it took to obtain that profit is also critical. To really measure whether or not an investment is a good one, the investor…[READ MORE]

Interest-only loans won't inflate a new housing bubble if they remain relegated to the fringes where few borrowers use them. Every loan product has its place, even the toxic loans of the housing bubble: Option ARMs, interest-only, reverse mortgages, adjustable rates, high LTV, subprime. All mortgage products serve some borrower’s unique financial circumstances. Contrary to popular belief, exotic loan products were not inventions of the housing bubble. The problem during the housing bubble was the proliferation of these products outside their usual niche caused by the mispricing of risk. If risk were priced properly, these exotic loan products would have been prohibitively expensive, and far fewer borrowers would have used them. Exotic loans become toxic when they escape their specialized…[READ MORE]

Assets that provide periodic cash payments provide the greatest utility to those who want to live a carefree life. Peace of mind is an underrated and undervalued emotional state. Most people choose lives of speculation, competition, and make believe, erroneously believing if they arrive at some destination known as “being rich,” they will have everything they ever wanted, and that will make them happy. It won’t. There is a peace of mind that comes with wealth, but this emanates not from the pile of money, but the cashflow that pile of money gives off. The size of the pile may get bigger or smaller depending on the market winds, but if the cashflow is stable, the size of the money pile is irrelevant: The real wealth is…[READ MORE]

The monthly housing market reports will now be made available for direct download with these weekend posts. If you want access to all reports and the archives, please register with the site and visit the Subscriber's Reports page. Historically,  properties  in  this  market  sell  at  a  9.5%  discount.  Today's  discount  is  15.2%.  This  market  is  5.7%  undervalued. Median  home  price  is  $490,000  with  a  rental  parity  value  of  $560,100.  This  market's  discount  is  $70,100. Monthly  payment  affordability  has  been  worsening  over  the  last  2  month(s).  Momentum  suggests  worsening  affordability. Resale  prices  on  a  $/SF  basis  increased  from  $398/SF  to  $401/SF.  Resale  prices  have  been  rising  for  4  month(s). Over  the  last  12  months,  resale  prices  rose  9.4%  indicating  a  longer…[READ MORE]

The collapse of the Chinese stock market may precipitate a repatriation of capital back to China triggering a selloff in California real estate. The Chinese government and central bankers operate a Ponzi scheme to accelerate economic development to help China catch up to the rest of the world. First, this Ponzi scheme inflates real estate prices, and over the last year, the Ponzi scheme extends to the stock market, which is up over 150%. Unfortunately, since it's a Ponzi scheme, Chinese officials can’t figure out a way to unwind it without devastating their economy, so they keep putting more and more money into it, hoping desperately that it works itself out. It isn't working out as officials hope. This is…[READ MORE]

If mortgage rates rise as expected, home sales will fall as a direct consequence of crumbling affordability. Sometimes predictions are so basic, so simple that dressing them up with detailed analysis is unnecessary. Predicting falling sales in the second half of 2015 is one of those predictions. First, there is a seasonal component to home sales, and sales volumes nearly always peak in June and fall off for the rest of the year, so predicting a slowdown in sales is a low-risk prediction. But not being a coward, I will go one step beyond that, and I predict sales will decline even more than the seasonal factors would explain. So what simple analysis leads me to make this prediction? It's…[READ MORE]

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