Archive for October, 2016

Buyers convince themselves rising mortgage rates won't impact them, but they fail to consider how rising rates will curb home price appreciation. I strive to educate this blog's many readers and dispel fallacies surrounding residential real estate. Sometimes, the public impresses me with their wisdom; For example, adjustable-rate mortgage use is very low despite the potential savings. However, when it comes to the impact of rising mortgage rates on housing, people prefer to stick their heads in the sand and hope for the best. Homebuyers consume Kool-aid with respect to their Coastal California home purchases. The bust is only four years behind us, but people already comment on how buying houses in Coastal California is the smartest investment someone can…[READ MORE]

Despite criticisms of the methods, L.A.s turf removal program eliminated millions of square feet of water-hungry grass. The recent drought in California prompted many stories of drought shaming that amounted to peer pressure to reduce water usage. People wore their brown yards as badges of courage and openly criticized their neighbors who spent water on green grass. Many nimbys used the water shortage as another reason to oppose new home development, but these nimbys failed to look in the mirror -- or perhaps out their front window because the biggest wasters of water were homeowners watering their lush green grass. Modern houses with water-saving toilets and showers and drought-resistant plants use a tiny fraction of the water used by older…[READ MORE]

New businesses help people overcome the hurdles of finding, securing, and managing rental properties in far-flung locales. Back in August of 2010, I bluntly told people to buy Las Vegas real estate. I noted that the median home in Las Vegas — a 3 bedroom 2 bath detached property — cost less than $500 per month to own while rents averaged over $1,000. Here is what I told everyone who would listen: "Anyone thinking of investing in Las Vegas, now is the time ... because the price-to-rent ratio is outstanding, and unless you are buying in the worst neighborhoods, I don’t see how prices could go much lower ... and the rental stream makes ownership there very rewarding. I am bullish on…[READ MORE]

California could cure its housing shortage by mandating that large projects and municipalities provide sufficient housing to match commercial development. California needs more housing. Everyone recognizes this fact, even the nimbys who oppose all new developments. California builders and developers fail to produce sufficient quantities of housing because they meet opposition at every turn. Nobody wants more housing because they associate housing developments with increased traffic congestion, pollution, and the destruction of the natural environment. California suffers from an economic malady known as the Tragedy of the Commons. According to Wikipedia, "The tragedy of the commons is an economic theory of a situation within a shared-resource system where individual users acting independently according to their own self-interest behave contrary to…[READ MORE]

Chinese housing isn't valued based on objective financial metrics. Investors buy what they believe others will find valuable. Encouraged by the government, the Chinese people support a massive real estate Ponzi scheme. Chinese investors value property subjectively, like a beauty contest, because by any standard metric, Chinese real estate prices justify very little value. The Ponzi scheme inflated far beyond any rational level, and it shows no signs of popping. So how does the government do it? How is an unsustainable bubble sustained? The government doesn’t provide savers any other viable alternatives for storing their wealth. Bank accounts and housing account for 85% of the investment wealth in China. Chinese concentrate their wealth in real estate because owning carries little…[READ MORE]

While probably late to the party, new large investors in single-family rentals embrace solid reasons for investing in this business model. Wall Street bought thousands of foreclosures during the housing bust. The capital from these investors absorbed the excess of foreclosures from the millions of borrowers who quit paying their toxic mortgages. Many observers believed this business model would fail. While apartment complexes enjoy economies of scale on maintenance and operating costs, dispersed single-family homes suffer from higher maintenance and management costs. Many early players in the REO-to-rental game exited the business due the problems critics warned about, but these smaller players were gobbled up by larger players with more efficient operations and lower capital costs. The industry matured over the…[READ MORE]

Homeowners cash-out their home equity to supplement their incomes reminiscent of the bad behavior that spiraled out of control during the housing mania. Lenders offer homeowners nearly free money, so unsurprisingly, borrowers take the money. During the housing mania, bankers offered this money without regard to the borrower's ability to repay, an open invitation to steal that many took advantage of. Mortgage equity withdrawal dried up during the bust, partly because borrowers lacked equity, but partly because lenders refused to support the personal Ponzi schemes of so many people. As conditions improve, lenders underwrite these loans again, but so far, they employ conservative underwriting standards and limit the cash-out to a reasonable loan-to-value ratio. Over time, lenders naturally become more aggressive…[READ MORE]

realtors consistently and falsely blame low inventory for weak sales. The truth is that prices are getting too high for many buyers to afford. realtors follow an unwritten rule: never say prices are too high. Occasionally, they may say something about affordability, but realtors generally reserve that euphemism for their complaints about financing. In a realtor's world, prices are never too high because high prices can always be overcome with "innovative" financing. Since realtors never admit prices are too high, when prices really are too high, they must find some other plausible reason why sales slow down or prices fall. Right now, with an expanding economy finally pulling out of the Great Recession of 2008, we have low unemployment, more high-paying…[READ MORE]

The four unique features are (1) low mortgage interest rates, (2) low MLS inventory, (3) low owner-occupant demand, and (4) high but affordable house prices. Prior to the housing bubble, the normal state of affairs for the housing market was slowly but steadily rising prices that matched the growth in rents and incomes. From the early 1980s through the early 2000s, house prices rose a bit faster than incomes due to steadily falling interest rates, but generally the rate of appreciation was gentle and predictable. A normal housing market exhibited a balance between supply and demand. Millions of individual homeowners possessed the equity to sell when they pleased, and banks owned very few properties. Prior to the bust, lenders exerted very…[READ MORE]

Homebuilders produce the proper number of homes to match measurable demand. Homebuilders only build houses if they can sell them. If homebuilders produce too many, they accumulate standing inventory, which they have to discount or incentivize in order to sell. If the problem persists, they lose money on the sales, and unless they want to go out of business, they stop building more homes. Homebuilders always produce the proper amount of houses to meet demand at any point in time. However, demand derives from dollars. People's desires or needs for housing doesn't always equate to demand. Unless the people who want a home can produce the money necessary to obtain it, their desire creates no measurable demand. During the housing…[READ MORE]

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