Archive for January, 2017

It takes more than a manic desire to inflate a bubble. The ability to deliver capital to the market is also an essential element. Many people who believe in the wisdom of the markets subscribe to the efficient markets theory. It postulates that market participants have equal access to good information and they make rational judgments based on the available data. The theory appeals to vanity as everyone likes to believe they demonstrate above-average financial acumen and make rational decisions. Unfortunately, that isn’t the world we live in. People often fall victim to groupthink, pick and chose what data to believe and what to ignore, and seek the perceived safety of the herd when making financial decisions. The housing bubble was…[READ MORE]

We running out of land! Buy now or be priced out forever! We're even running out of land on the moon! Most participants in financial manias share a common belief in the scarcity some precious resource. The notion that we’re "running out of land" sparked several financial manias. California has land booms and busts at various times in its history. Florida had a huge land boom and bust in the 1920s. Given the millions of acres of undeveloped land in California and Florida, particularly 100 years ago, the rationality of these booms and busts is rather suspect. But once people start to believe the shortage is real, the frenzy mentality takes over, and rationality is discarded in favor of greed and stupidity.…[READ MORE]

Rent a property using 23% or less of your gross income and save 8%. This prepares you for a 31% debt-to-income payment and provides a quality of rental you could later buy. I never embraced the innovations in real estate finance that inflated the housing bubble. I never considered any financing other than a fixed-rate amortizing mortgage, so I was already priced out by 2003. The world of mortgage innovation left me behind. By 2006 preparing for home ownership only required finding a house and signing a few loan documents. It’s a lot more difficult today. Now the old rules are back. Buyers today have to save for a down payment and make sure the payments are affordable. Since so…[READ MORE]

High house prices and rising mortgage rates will hurt affordability and offset any gains from wage growth and an improving economy. Have you looked for a home to buy lately? They're expensive, and although 4% mortgage rates enable buyers to finance those prices, mortgage rates only make houses affordable at levels below 4.5%. Over the last four years, all lenders revamped their loss mitigation procedures to can-kick loans if borrowers default until house prices exceed the balance of the loan. No matter what else happens in the market, unless the banks are forced to change their policies by the government regulators or the federal reserve (a very unlikely event), lenders will continue to kick the can with loan modifications and suspend homes…[READ MORE]

The housing market will flourish or flounder depending on mortgage interest rates. For each of the last three years, I made a series of bold predictions for the upcoming year. You can judge for yourself how I did: Bold California housing market predictions for 2014 Bold California housing market predictions for 2015 Bold California housing market predictions for 2016 2016 Review My thoughts about 2017 are the same as they were last year, so let's start be reviewing those observations. My updated observations are in [brackets]. It’s all about interest rates Whatever is going to happen in the housing market in 2016 [and 2017] depends entirely on the course of mortgage rates. Why? Because housing markets are very interest rate…[READ MORE]

Investors will supplement down payments in exchange for a share of future profits. Would you make a deal like that? Are there any circumstances under which homebuyers would be willing to share in the upside of home price appreciation? Would you sell an option worth 35% of the upside in exchange for half (10%) of your down payment? You wouldn't have any payments like a second mortgage, and if you sell for a loss, the investor shares in the losses with you. When you reflect on it, the main reason you wouldn't participate is because you believed you will make a fortune on appreciation, and you don't want to share it. Strong arguments can be made for a ten to…[READ MORE]

One man’s mortgage debt is an entire neighborhood’s equity. Higher mortgage rates put pressure on the size of mortgage balances, potentially eroding homeowner equity. When a buyer purchases a house, their purchase sets a standard by which the value of other houses is inferred. When a house sells for a high price, the new sale boosts the value every property in the neighborhood. Of course, as many lamented during the bust, when a house sells for a new low price, the sale drags down neighborhood values as well. When prices rise, neighbors cheer each new high comparable sale because it adds to their net worth, illusory though it might be. Many people enjoy checking their Zillow Zestimate, particularly during a…[READ MORE]

During the housing bust, every effort was made to keep homeowners in their houses. Renters were mercilessly thrown in the street with little or no fanfare. Our real property system functioned well for centuries with very little change. Prior to the housing bubble, it was widely accepted that people borrowed money to buy houses and if they failed to repay according to the terms of the promissory note, the mortgage agreement allowed the lender to call an auction to regain their loan capital. People obtained homeownership as an earned reward, not an entitlement. The basic dilemma is simple, most people don’t have the cash to buy a house, and it would take them most of their adult lives to save…[READ MORE]

Any legislation or policy that promotes housing production is better than producing no housing at all. In the post, Will building more roads and houses merely increase demand?, I lamented that nimbys managed to turn the solution into part of the problem. They embrace the idea of "induced demand," a belief that providing more roads or housing fails to alleviate supply shortages because it stimulates demand. It's the ultimate weapon against new development because we're damned if we don't build, but we're doubly damned if we do build. The real solution to the housing affordability problem is to provide sufficient supply to meet the needs of the growing economy and population. As long as California creates many jobs but builds few…[READ MORE]

Dodd-Frank should prevent house prices from rising so high that only fools and millionaires can afford them. When house prices rise rapidly and mortgage rates go up, the cost of ownership rises even more rapidly, and realtors stoke fears with “buy now or be priced out forever.” Under these circumstances, it’s easy to get stressed out and worry about what’s outside of your control. I didn’t buy an OC house at the bottom of the downturn. I knew it was a good time to buy, but for a variety of reasons, I was not in a position to buy when the market was ripe. Now that the cost of ownership is 50% higher, I am less motivated to buy a…[READ MORE]

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