Archive for December, 2015

The cost of owning and the cost of renting in OC housing market is balanced. Unfortunately, neither one is affordable based on local incomes. I once wrote that Rental parity establishes the value of residential real estate, but others use different metrics to measure value and affordability. If the metric is price-to-income, today’s prices look inflated; if the metric is payment-to-income, today’s prices look undervalued. So which metric is correct? In my opinion, they both are. Over the short term, it’s impossible to ignore the payment-to-income ratio because it will establish the market equilibrium at any point in time; however, over the long term, it’s hard to ignore price-to-income because interest rates will revert to the mean, so the long-term…[READ MORE]

Rising interest rates will cause the US dollar to appreciate in value, making US real estate too expensive for foreign investors. When interest rates go up, the American consumer will find housing less affordable, and as a result, home sales volume will sputter, and lower home prices may follow. How will rising interest rates impact the Chinese real estate investor? Home sales to Chinese investors began slowing down early this year because the rise in the dollar relative to the Yuan made houses about 10% more expensive. Those that purchased before the dollar rose in value obtained a windfall, but the increased prices made US real estate less attractive to future buyers. If the federal reserve raises interest rates in…[READ MORE]

Since the mid 1990s, mortgage interest rates and home sales moved in opposite directions. Dodd-Frank made this inverse correlation even stronger. It's clear that rising interest rates do not boost home prices. Perhaps rising wages can offset the damage, but rising mortgage rates are never desired by realtors or existing homeowners. What's less discussed is that rising interest rates do not boost home sales either, and while homeowners aren't as concerned about that problem, realtors really hate it. Back in February of 2013 when mortgage rates were near record lows, I wrote that future housing markets would be very interest-rate sensitive, despite assurances to the contrary from most macro-economists. The prevailing economic view is that the housing market would respond…[READ MORE]

Ponzi schemes boost the economy through a flush of consumer spending with borrowed money. Unfortunately, Ponzi spending is not sustainable. Macro economists look for data correlations to infer causations for economic events; however, they often fail to investigate the individual incentives driving the herd behavior that shows up in their data. What I find amazing and amusing is the completely erroneous interpretations they conjure up without a clue as to the real cause. My favorite example is the notion of a wealth effect, first postulated by Carl Case and Robert Shiller. They noted that stock prices had little effect on people’s propensity to spend; however, house prices have a strong correlation to people’s spending habits. Economists noted that people spend…[READ MORE]

Nobody knows what will happen when the federal reserve finally raises interest rates, not even the federal reserve. Back in February I predicted the federal reserve would not raise interest rates in 2015. At each of the last four meetings, the pundits were increasingly certain the federal reserve would raise rates, and Yellen did not. This time, the usual suspects are even more certain. Will they be wrong again? The federal reserve is generally not a proactive entity, generally leaving rates low until forced to raise them reactively. Many influential economists, right or wrong, warn against any change in economic policy that might derail the economic expansion. The only reasons the federal reserve usually raises interest rates is a decline…[READ MORE]

By increasing borrowing costs for bankers, rising interest rates may force them to foreclose and resolve their non-performing loans. Most borrowers over the last decade used fixed-rate financing, so rising interest rates will not cause their payments to rise and put them at risk of default and foreclosure. That is not how rising interest rates might lead to more foreclosures. We also know that many loan modifications are facing interest rate resets that will increase the cost of ownership of many struggling borrowers. However, these loans will be can-kicked as necessary, so this is not how rising interest rates might lead to more foreclosures. The real reasons rising interest rates could cause more foreclosures is more complicated than that. Rising…[READ MORE]

Home sales generally decline in the fall, but this October saw a larger decline than normal. Was TRID implementation to blame, or high home prices? Lenders don’t set out to inflate housing bubbles. The pressures on lenders to obtain business prompts them to expand loan programs and develop “innovative” loan products in order to keep sales volumes up when prices reach the limit of affordability. Sellers could always rely on lenders to arm borrowers with dangerous loans to finance ever-higher asking prices. That will not be the case in the future. Dodd-Frank regulations installed a rigid ceiling on affordability. Borrowers must document their income, and that income is applied to amortizing loans with a reasonable debt-to-income ratio. Buyers can either…[READ MORE]

The lowest rungs on the housing ladder pay so much for a roof over their heads, they can't live a life. California has a housing problem. Anyone who lives in California copes with higher housing costs than nearly everywhere else in the United States. This problem is a boon to landowners and high wage earners, but it's a bust for lower middle class wage earners who often put 50% of their income toward housing. Why do we have this problem? First and foremost, the problem is one of supply. California has a chronic shortage of housing. The lack of supply is the primary reason prices are so high. When supply is limited, people substitute downward in quality just to obtain…[READ MORE]

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