Archive for September, 2016

The next housing bust will preserve prices at the expense of home sales volume. Real estate only goes up, right? The idea that real estate only goes up was the erroneous belief shared by every participant in the housing mania. Everyone who believed in this fallacy threw caution to the wind and paid any price to buy a home. Why not? If house prices really couldn't go down, then value really doesn't matter. The housing bust rather dramatically proved that real estate can, in fact, go down. From 2007 to 2012 to varying degrees house prices declined quickly and painfully everywhere in the United States. Why did house prices go down? House prices were elevated 60% to 100% above fundamental value…[READ MORE]

Would you like to rent a home for a year or more to decide if you really wanted it? You can. Many companies will allow potential customers to try their products for some period of time before the customer buys it. If the customer doesn't like the product, the customer may return the product and pay nothing. If the customer does like the product, then they buy it. Surprisingly enough, people can do this with residential homes as well. After the housing bust, institutional money flowed into residential real estate for the first time. These companies bought REOs and rented them out, often to those who lost their homes in foreclosure but wanted to stay in the neighborhood. These renters were…[READ MORE]

Rental parity analysis provides a benchmark of value that enables buyers and sellers to anticipate changes in the market. People who invest in stocks often use the price-to-earnings ratio among others to estimate value. People who trade stocks use a variety of technical indicators to both screen stocks to trade and to improve their timing. Both techniques of fundamental and technical analysis are widely accepted and used by securities investors. Real estate is a different story. Real estate investors utilize capitalization rates, cash-on-cash returns, and internal rates of return to evaluate individual properties, but these measures are far less applicable to assessments of entire markets. To evaluate an entire market of properties, economists employ various ratios including price-to-rent, price-to-income, payment-to-income,…[READ MORE]

Since its inception, the CFPB has been under attack by the financial industry. The huge Wells Fargo fraud ensures it's survival. The financial elites in the United States hate the Consumer Financial Protection Bureau (CFPB) because the CFPB opposes those who want to rape and pillage the American people. The would-be criminals operating our too-big-too-fail institutions spend millions lobbying Congress and buying politicians like Jeb Hensarling to spout nonsense about the problems caused by the CFPB. After the financial elites destroyed the economy and nearly brought down our entire financial system with reckless risk taking and foolish lending, legislators were forced to act for the greater good; thus we have Dodd-Frank and the CFPB. Why the Consumer Financial Protection Bureau is…[READ MORE]

Hedge funds act as the garbage scows of the housing bust, cleaning up bad loans and distressed properties using a variety of tactics. Prior to the housing bust, mom and pop investors and professional property rehabbers acquired most distressed residential properties. However, since the housing bust was so large, the volume of these properties far exceeded the capacity of small investors to absorb the inventory. This lack of capacity diminished demand and caused home prices in many markets to fall to such low levels that institutional money came to the rescue. Institutional investors created the REO-to-rental business model and funded it with billions of dollars. The large institutional investors accomplished what the moms and pops ordinarily do: they bought properties,…[READ MORE]

The wave of HELOC recasts is upon us, and lenders must cut deals with borrowers or face another wave of delinquencies and foreclosures. Since last night was the kickoff of the NFL regular season, it's only fitting that lenders prepare for another long season of can-kicking bad loans. This time, instead of first mortgages going bad, the second mortgages sitting on top are due to recast. A loan recast is different than a rate reset. When a loan resets, the payment could go up or down depending on the prevailing rate at the time. However, when a loan recasts from an interest-only payment to a fully-amortized payment, the payment will almost certainly go up -- probably quite substantially. Home equity…[READ MORE]

Some people like extra living space, others like to show off. Buying a McMansion appeals to both types of buyers. For years urban planners worked to change public attitudes toward smaller houses near public transit stops. The tiny home movement ties into the revulsion many people feel for the ostentation and excess of large houses, particularly those with little or no architectural merit. Despite the efforts of urban planners and tine-home advocates, most Americans still believe bigger is better. I recently noted that new homes over the next decade will be smaller, not because people want smaller homes, but because younger and less affluent buyers will dominate new home sales. The trend toward smaller homes isn't a reflection of changing taste,…[READ MORE]

 Until they are forced to by a crisis, it's unlikely the next president or Congress will pass meaningful housing finance reform. Between the GSEs (Fannie Mae and Freddie Mac) and the FHA, the government directly backs more than 80% of loan originations in the United States. Legislators recognize the GSEs should be eliminated because their implied government backing is now explicit. These entities are not private entities, although many private investors would like them to be so they could profit off the government guarantee. Whenever people start discussing how to reform or terminate the GSEs, invariably someone will try to scare everyone by claiming US housing finance will cease to function, the housing market will crash, or some other nonsensical…[READ MORE]

High wage growth and nimby behavior that unduly restricts housing supply is a combination that inflates house prices in major cities. For whoever has will be given more, but whoever does not have, even what he has will be taken away from him. Jesus Christ -- Mark 4:25 The rich get richer and the poor get poorer. Karl Marx considered this trend inevitable, and he even named it the Law of Increasing Poverty. The unbridled capitalism of the 19th century led to extreme concentrations of wealth as powerful individuals ruthlessly created monopolies to crush their opponents while delivering low-quality products at very high prices. On a more basic level, the rich get richer because they don't consume everything they produce. Their savings…[READ MORE]

When sellers can't get their asking price, their alternatives are not great, but if they bought below rental parity, at least they have an option that isn't financially devastating. My first job out of school was with a retirement community developer in Leesburg, Florida. Since I had the expertise, and since it was cheaper than renting, in 1997 I built my own house at 2 Weston Road. Even though I could have built it cheaper, since I was going to live there myself, I put in nicer finishes and landscaping than a builder ordinarily would have provided. The added cost wasn't a problem until about a year after I moved in when I took a job 80 miles away, and…[READ MORE]

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