Archive for 2016

The industrial midwest did not participate in the growth of the last 40 years. Once in a while, I wonder what life would have been like if I stayed in my small hometown in Wisconsin. Members of my extended family and friends from school still live there, and I generally visit every year, so I know the progress -- or lack thereof. I find it comforting when I go back that very little changed over the last 40 years. Some of the storefronts are different, but for the most part, the built environment is as it was when I grew up. In many respects, it's the realization of the nimby dream of "preserving neighborhood character." It's like the entire town was…[READ MORE]

House prices exceeded the 2006 housing bubble peak in 2016, but when adjusted for inflation, house prices may never reach that benchmark. The NASDAQ recently surpassed the tech bubble high from 2000. Anyone who bought the index in March of 2000 could finally sell their holdings without losing money. While some investors cheer this victory, those investors who didn't take a loss received dollars back from the trade that retained significantly less buying power than they held in 2000. In fact, after adjusting for the erosion of buying power, these investors still lost a third or half of their money. Investors in real estate make the same mistake. I recently demonstrated that an investor can sell a house for $100,000 profit…[READ MORE]

California creates more jobs than houses, so people leave the state for cheaper housing. In the early 1970s, California began restricting new development. At first, it wasn't a problem, but when California voters later passed Proposition 13, they made residential real estate much less desirable than commercial properties because the latter provides both jobs and sales tax revenue, whereas housing barely provides enough revenue to cover the cost of providing services. Municipalities began shunning housing in favor of commercial development, and nimbys joined the chorus, complaining about traffic and the "loss of neighborhood character," whatever that means. The natural advocates for housing are realtors, but since they only make money on resale houses, their advocacy for new construction is tepid…[READ MORE]

About 25% of potential homebuyers react with foolish urgency, but nearly half respond by either substituting down in quality, delaying their purchase, or canceling it altogether. The national association of realtors is notorious for spinning data to support a false narrative the instills urgency with potential homebuyers. The minions working for the association routinely seek out data points supporting their narrative even when that narrative doesn't mirror reality -- in fact, the less their narrative reflects reality, the more they work to spin the data. For example, NAr pending home sales data is worthless and misleading. realtors represent themselves as experts on real estate whose advice can be relied upon by market participants. However, realtors care not whether it's truly is a…[READ MORE]

Should everyone really own a house? Are renters so much less a part of their communities that the government must spend billions of dollars subsidizing home ownership? These are important questions. How we answer them will guide how we remake our housing finance system which was destroyed with the collapse of the housing bubble. The current system of government props with the taxpayer insuring more than 80% of the mortgages in the US is not tenable or desirable. Is there a balance between public and private sector appropriate to the housing market? Overzealous Intervention Dooms the Market Edward J. Pinto Those who want government guarantees for mortgages see them as a path to encourage homeownership and market stability, but instead…[READ MORE]

The housing bubble pulled forward a generation of buyers; the housing bust cost these buyers their homes and their good credit, removing many of them permanently from the housing market. Lenders succeeded in manipulating market prices by restricting supply; however, for a true recovery in housing, the market requires resurgent demand from first-time homebuyers and move-up buyers. These two groups are typically the largest source of housing demand, with the first-time homebuyer the bedrock of the housing market; without first-time homebuyers, no move-up market exists. The first-time homebuyer market propels upward by job growth and household formation; when the economy is strong and creating good-paying jobs, young people form new households and use their new income to bid for real…[READ MORE]

Removing the supply of distressed homes created a supply shortage homebuilders responded to by providing more houses, hiring construction workers, and stimulating the economy. If I understand Keynesian theory properly — which is important to understand federal reserve policy — inflating asset values through low interest rates triggers businesses to expand because borrowing costs are so low, they can make marginal opportunities productive. As businesses expand, they hire more people for their operations. The newly employed create demand for goods and services, stimulating more demand for goods and services, which in turn creates more business demand, puts more people back to work, and so on — a virtuous circle. Unfortunately, during periods of overcapacity, the expansion proceeds slowly because businesses…[READ MORE]

Higher interest rates reduce housing demand by causing mortgage applications to decline, reducing loan balances, harming employment, and suppressing wages. The federal reserve establishes interest rate policy, and for six years, the federal reserve held the benchmark federal funds rate to zero to stimulate the economy. They finally raised rates last December and followed with a second boost this December, the first rate hikes in a decade. During the period when interest rates were held at zero percent, the federal reserve applied stimulus through a policy known as quantitative easing, a fancy term for printing money. Quantitative easing and mortgage interest rate stimulus were designed to bail out Wall Street, not benefit Main Street. In 2013 the federal reserve decided to…[READ MORE]

Rather than react with excitement and increased urgency, potential homebuyers fear rapidly rising home prices signal a new housing bubble. Does it? California endured three large housing bubbles since the early 1970s. Each one was kicked off by a huge house price rally, inflating prices well beyond any reasonable fundamental measure. From early 2012 to mid-2013, the house price rally was just as steep as previous price surges, but not as long in duration. Cautious home shoppers fear this latest rally may signal yet another housing bubble, but rather than purchase for fear of being priced out forever, buyers wait or decide to safely rent instead. I consider this cautious behavior a great sign for housing. In the past, realtors…[READ MORE]

Lenders lower standards to qualify more borrowers and increase business, a precursor to another bubble, but only if risk is again mispriced. The recipe for a housing bubble includes many ingredients such as loose lending standards. However, loose standards merely qualify more borrowers. While qualifying more borrowers may extend the rally, it requires a gross mispricing of risk and enormous capital flows into unstable loans before prices get pushed up into bubble territory. Let’s assume for a moment all qualification standards were eliminated and anyone who wanted to borrow money could get a loan, similar to what happened in 2004 through 2006. Would this cause a housing bubble? In my opinion, it would not. It would inflate prices, and it would…[READ MORE]