Archive for July, 2016

Ten years ago people truly believed real estate prices only go up. As a result people behaved imprudently and borrowed too much money because they believe they could always sell the property for enough to pay the loan. The mantra of the National Association of Realtors is “real estate only goes up.” This economic fallacy fosters the belief in future price increases and the limited risk of buying real estate. In general real estate prices do increase because salaries across the country do tend to increase with the general level of inflation, and it is through wages that people make payments for real estate assets. When the economy is strong and unemployment is low, prices for residential real estate tend to rise.…[READ MORE]

In the absence of rising wages, when mortgage interest rates go up, one of two things will happen: either sales will fall, or prices will fall. Since we don't have a free market in housing, sales will fall and remain depressed for a very long time. Assuming a consistent payment, higher mortgage rates decrease the size of the loan and reduce the amount borrowers can bid on real estate. While it is possible the federal reserve may print enough money to spark wage inflation, given the high levels of residual unemployment and a low labor participation rate, wage inflation is a long way off, almost certain to come later than rising mortgage rates. Therefore, if rising mortgage rates results in…[READ MORE]

Over 6 million foreclosures were caused by mortgages with risky terms few borrowers understood. It's government's role to protect people from themselves, particularly when taxpayers fund the bailouts. Flying high is dangerous; just ask Icarus. Everybody was flying high on free money but they got too close to the sun and got burnt. When they fell back to earth, their impact created a debt crater that the rest of us are being asked to fill in. Borrowers took on enormous risks during The Great Housing Bubble. If this were not the case, US lenders would not have completed 6,324,545 foreclosures over the last ten years. Legislators accurately identified the risks assumed by borrowers that caused them to lose their homes,…[READ MORE]

Mortgage affordability products produce short term results, but they are unstable, and widespread proliferation leads to millions of foreclosures. Affordability products in the 00s were the financing panacea everyone in real estate hoped for. Widespread use of affordability products ushered in a new era of high home ownership rates, rapidly rising prices, and economic prosperity through "liberating" home equity. Everyone got rich: the agents, the brokers, the bankers, the buyers, the sellers, and everyone nearby who enjoyed a prosperous economy driven by the profligate behavior of their neighbors. It was the best of times. Unfortunately, the "innovations" of the last housing bubble proved to be costly failures. These affordability products contained Ponzi finance alternatives such as negative amortization that allowed…[READ MORE]

Real estate agents are among the least ethical business practitioners. They desperately need a culture of conformance to a code of ethics. The law defines what a society deems as minimally appropriate conduct. People who violate the law (and get caught) pay penalties or endure incarceration for their transgressions. However, within the law people may engage in a wide range of behaviors that many others find morally repugnant. The moral compass of each individual determines whether or not they behave in ways others find objectionable. Calibrating this internal moral compass is the world of ethics. Religion is a widespread source of ethical precepts, and many people look to their religious teachings when determining their behavior in the business world. Unfortunately,…[READ MORE]