Archive for August, 2015

With the disappearance of the entry-level buyer, builders aren't building small, entry-level homes, so the average size of new homes keeps rising. The entry-level buyer utilizing only their savings plus a loan is the foundation of the housing market. If you follow the chain of move ups backward, it eventually leads to the entry-level buyer, and as a result, nobody in the real estate market gains move-up equity until the entry-level buyer does. If owners of entry-level properties do not gain equity over time due to price declines or stagnation, they do not have the equity necessary to move up, and neither will any other seller in the move-up equity chain. If the first-time buyer disappears from the market, which…[READ MORE]

Housing markets are dominated by millions of individuals making emotional decisions rather than a small number of highly-trained professionals. People buy houses as family homes for emotional reasons, and not always rational ones. Many analytical people conduct research, analyze financial returns, and so on, but this is generally only a rationalization for what is a deeply personal and emotional decision. A place to raise a family Many people buy because they want to provide a safe and comfortable home to raise a family. It’s a primal urge. Although it shouldn’t make a difference, there is an emotional quality to home ownership that is not replicated by renting. Satisfying one’s emotional needs is an instinctive drive, and this compels many people…[READ MORE]

Banks reject most loan modifications because they really don't want to modify loans, and in many cases, the applicant doesn't deserve a break. If they had it to do over again, lenders wouldn't have made so many loans to weak borrowers during the housing bubble. Underwriting standards were nearly non-existent late in the bubble, and delinquency rates ran so high that lenders needed to reevaluate these borrowers after the loan was already made. The problem with underwriting after the fact becomes apparent when lenders reject three quarters of the reviewed loans. At the peak of the housing bubble, about three quarters of marginal loans to spotty borrowers probably shouldn't have been funded at all. The real reason for loan modifications…[READ MORE]

People should fear the consequences of being trapped underwater with an expensive mortgage on a cheap house. During the housing bubble, nobody feared debt. When people believe real estate prices can only go up, then they see no risk in buying because they believe they can sell the property for enough to pay the debt. This peace of mind is rational as long as everyone disbelieves the reality that house prices can go down. The housing bust ended the delusional complacency regarding mortgage debt. Millions of people discovered very painfully that house prices can go down, and they can end up owing more than they could possible repay absent recovery in house prices. With this pleasant delusion shattered, what emerges…[READ MORE]

Those who are no longer underwater but lack the equity for a move-up could sell if they wanted, but they are not listing their homes. For many loanowners, the last eight years in borrower purgatory felt more like borrower hell. They’ve been trapped beneath their debts, and any remedies for their situation would carry negative consequences of their own. Many people opted to strategically default, and I openly encouraged this action for years because it immediately relieved the emotional distress and put people on a path toward building a new future. However, those that did strategically default had to pay a price of a lowered credit score and lingering debt collection issues. Many others borrowers opted to sell short, but…[READ MORE]

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