Archive for 2016

The down payment barrier inhibits home sales, but reduces the risk to the US taxpayer. California endures a housing affordability problem. And it’s not merely that house prices are high. Families with high wages could finance mortgages large enough to buy more expensive properties, but they face another roadblock: the down payment barrier. This problem is illustrated below. In Orange County, the conforming loan limit on GSE loans and the FHA loan limit is $625,500. For purposes of this illustration, I used the 3.5% down required on FHA loans because the 3% down program at the GSEs isn’t widely used due to the high cost of private mortgage insurance.   An FHA borrower in Orange County can buy a home…[READ MORE]

The "months of supply" indicator has little or no predictive power and often gives a false impression of the strength or weakness of the real estate market. Realtors invented the "months of supply" to measure market absorption, providing a reading of how fast homes sell relative to the supply of inventory available. For example, if sellers list 50 homes for sale and if 10 of them sell, it would take 5 months to sell the remainder if no additional inventory came to market. The "months of supply" ostensibly reveals the aggressiveness of buyers relative to sellers. In theory, a market with a low months-of-supply exhibits greater buyer demand than one with a higher months-of-supply. As an indicator, it's supposed to…[READ MORE]

The working class in California struggles with high rent until they give up and move out of state, leaving behind the landed gentry. California housing policies devastate the lower middle class. 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- and middle-class wage earners who often put 50% of their income toward housing. Renters who must spend so much of their paycheck on rent fail to save for a down payment, which becomes a vicious circle that sentences most of the working class to indentured servitude to the landed gentry until these workers succumb to…[READ MORE]

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]

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