Archive for August, 2015

Inflated rents portend inflated house prices. If rents are at unsustainably high valuations, then so are house prices. Historically, rent and income were bound in a tight relationship because renters generally pay the bills out of current income rather than savings. If income rises, renters use a portion of this increase to rent a nicer place, or due to the collective activity driving up rents, sometimes renters must pay more just to stay where they are. In the depths of the Great Recession, personal incomes dropped because many people lost their jobs and many others barely hung on. Ordinarily, such circumstances would cause rents to weaken as fewer workers with less money bid on the available rental housing stock, forcing…[READ MORE]

The federal reserve couldn't have prevented the housing bubble and bust through interest-rate policy alone. In response to the housing bubble and bust, Congress passed the Dodd-Frank financial reform. These new mortgage regulations will prevent future housing bubbles by effectively banning destabilizing loan products with interest-only and negative amortization features used to inflate previous bubbles. Those loan programs enabled buyers to greatly inflate house prices from stable levels set by wages and mortgage rates. Despite the groundbreaking change to real estate markets caused by this recent legislation, most housing market analysts and real estate economists fail to recognize the impact of these changes on the market, and they continue to make predictions based on previous history and their previous understanding…[READ MORE]

Many of today's problems in housing result from policy changes and emergency measures instituted to minimize the damage from previous housing bubble. House prices can only rise with wages on a sustainable basis. While policymakers can tamper with mortgage rates to influence affordability in the short term, over time, mortgage rates revert to their long-term mean, and as a result, wages become the only long-term influence on market prices. Market prices for houses represent an agreement between generations. For one generation to benefit to a greater degree than their productivity and income growth warrant, the powers-that-be can inflate house prices through lowering mortgage interest rates, and for the Baby Boomers, this occurred. (See: Housing market impact of 25 years of…[READ MORE]

Historically, properties in this market sell at a 9.5% discount. Today's discount is 13.3%. This market is 3.8% undervalued. Median home price is $500,100 with a rental parity value of $565,000. This market's discount is $64,900. Monthly payment affordability has been worsening over the last 3 month(s). Momentum suggests worsening affordability. Resale prices on a $/SF basis declined from $401/SF to $398/SF. Resale prices have been falling for 1 month(s). Over the last 12 months, resale prices rose 6.6% indicating a longer term upward price trend. Median rental rates increased $16 last month from $2,544 to $2,560. The current capitalization rate (rent/price) is 4.9%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

American homebuilders never before built new homes in volume specifically to rent. Is this a passing opportunity or a new persistent business model? Prior to 2010, no companies existed that bought, owned, and managed single-family detached homes. The millions of foreclosures that followed the millions of mortgage defaults in the housing bust provided a unique opportunity to acquire large numbers of homes at prices that provided favorable cash returns. Prior to the housing bust, hedge funds didn't have the patience to accumulate portfolios of 25,000+ homes because it would have taken too much time and effort to assemble. Further, since prior to the bust house prices were very high, it didn't make sense financially to attempt to assemble a large…[READ MORE]

In a cynical example of bad governance, lawmakers created circumstances that will result in a crisis providing them political cover for their actions. Washington is so polarized that politicians need a crisis to get anything done. To that end, politicians created circumstances at the GSEs likely to result in a future crisis that will generate need for political action. Concerned citizens hoping for careful deliberation and a consensus solution (good governance) will be disappointed. Everyone in Washington knows the GSEs must be eliminated because the GSEs can't exist outside government conservatorship. The taxpayer liabilities from backing most mortgage loans are enormous, and taxpayer backing for the GSEs ensures the misallocation of credit. Ed DeMarco prepared for final shutdown of GSEs,…[READ MORE]

A late season influx of for-sale housing inventory caught observers by surprise. Since it's cloud inventory, the weight will not push prices lower. The Orange County housing market has a large number of cloud inventory listings, sellers who can’t reduce their price because they need to pay off a big loan. No matter how much of this inventory comes to market, it won’t put downward pressure on prices because it isn’t must-sell inventory, it’s can’t sell inventory. As mortgage rates rise, potential buyers can’t finance the asking prices these sellers need to complete a sale, leaving an old-fashioned Mexican standoff where neither party can pull the trigger. The market may stall and go nowhere. What are the potential outcomes? It’s…[READ MORE]

One of the primary motivations to buy a house is to provide a safe and stable nest for the family. While working for a homebuilder in my late 20s, I built my own home. At the time I was still single, but I built a home large enough to accommodate a family -- just in case. While I convinced myself the house was a good investment, the emotional satisfaction came from my secret desire to prepare for a family. When I was in my early 20s, I had no desire to be a homeowner, I moved frequently for school, and I had no ties to the communities I was living in. Why would I want to limit my options by…[READ MORE]

Looser loan standards on jumbo loans will increase demand in communities like Irvine, and it may serve to push prices higher. Despite the reflation rally that drove house prices higher, sales volumes over the last few years were well below historic norms as the market slowly transitioned from an investor-dominated market to an owner-occupant one. What the housing market needs is a resurgence of job and wage growth to create more borrowers with the ability to sustain home ownership. Unfortunately, the people who make a living from real estate transactions really don't care whether or not a buyer who borrowers most of the money can sustain home ownership; they care about doing the deal and getting paid. So while the…[READ MORE]

Historically, properties in this market sell at a 0.6% premium. Today's discount is 3.2%. This market is 3.8% undervalued. Median home price is $586,500 with a rental parity value of $595,600. This market's discount is $9,100. Monthly payment affordability has been worsening over the last 3 month(s). Momentum suggests worsening affordability. Resale prices on a $/SF basis increased from $380/SF to $382/SF. Resale prices have been rising for 6 month(s). Over the last 12 months, resale prices rose 2.9% indicating a longer term upward price trend. Median rental rates increased $24 last month from $2,674 to $2,698. 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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